In an article in the FT last Wednesday, economist John Kay corrected the widespread misconception that the Law of Rent was discovered by David Ricardo, noting that the phenomenon was first noted by a Scottish gentleman farmer and scholar, James Anderson, 50 years earlier.

John Kay then went on, as many economists do, to extend the term "economic rent" to the rent of talent, referring to footballer Wayne Rooney's new contract with Manchester United, worth the equivalent of £250,000 a week.

In our view, to use the term "rent" in this way is to spread confusion. The pay a footballer receives is his wages. However ludicrous the amount might seem, it is nevertheless a reward for labour. In this respect, it is unlike the rent of land, which is payment for the use of land which someone claims is "their's", a claim respected by the community at large when it assents to the owner's land title. No effort is required on the part of the land owner in order to receive this income. It is not a reward for labour.

One of our correspondents, Roger Sandilands, responded to the article in a letter sent to the FT, which was unfortunately not published. We reproduce it here.

Sir,

John Kay (“Wayne Rooney and Ricardo forge the ultimate dream team”, 30 March) draws an analogy between Mr Rooney’s salary and the huge rents that some owners of land can exact from the market. Essentially, Ricardian land rents depend on how much a given application of labour and capital can produce on a plot as compared to the same application on the least productive land in use.

For Ricardo, this was based on the classical labour theory of value: the price of grain was determined by its direct wage costs plus the indirect or “stored-up” labour costs of capital. If produce on the most desirable land more than covers these labour costs, the land commands rent. But land, “the free gift of Nature” (Ricardo), has zero labour costs. Thus its market-clearing price, determined by variable demand relative to the fixed and immobile supply, is a pure surplus to which the community has an equal ethical claim. What is true of differential agricultural rents is equally true of urban land where the bulk of all land values resides today. Hence land values can and should be the first, natural source of state revenue – prior to any taxation of the produce of our labour. Left in private hands they are an invitation to boom-bust land speculation.

Mainstream economics today, however, emerged from the nineteenth-century neoclassical revolution in which an “opportunity cost” theory of value came conveniently to replace classical theory. Thus the huge annual value of a site on Oxford Street was no longer the difference between what its owner could command compared to near zero rents on marginal land. Instead it was only the small difference between what it could fetch if, say, rented as a shop at £1,000,000 versus an office at £995,000.

Thus Mr Rooney’s rental income, on this neoclassical logic, is not close to £250,000 a week but only the small difference between what he can get from Manchester United versus Arsenal. To adapt John Kay’s conclusion, “readers of penetration” will be able to see through the absurdity of modern economic theory, both in respect of top footballers’ pay and top bankers’ bonuses. But at least these two groups do exert their own talents. What do landowners qua landowners do?

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